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NFTs: Crypto for collectors is more than just a game

12 Mar, 2021

NFT, or non-fungible tokens, are generating a ton of hype on the crypto grapevine lately. But the cryptocurrency world is prone to trends and buzzwords that build up a lot of interest — and speculation — before suddenly going quiet. The ability to analyse a trend and spot where the wind is blowing is a crucial skill for anyone in finance and crypto especially. But we first need to know what we’re dealing with and ask ourselves: is there a real substance behind the acronym?

What is fungibility anyway?

It would be a mistake to think of NFTs as just a hot new cryptocurrency. As StormGain CEO Alex Althausen details, they started as digital collectables in multiplayer games. NFTs work very differently from Bitcoin, Ethereum and other crypto coins. The most important thing to know about NFTs is that they are unique. And that uniqueness applies not to NFTs as a group but to each individual token.

Fungibility refers to an asset’s ability to be exchanged for another of the same asset without any difference in value. The majority of cryptocurrencies and fiat currencies are fungible; for example, Bitcoin, Ethereum, Monero and Ripple all are. If you have a Bitcoin and your friend has another Bitcoin, you can send each other a Bitcoin and nothing changes; you still have one Bitcoin each.

But NFTs are very different. They are still cryptographically generated (mostly using the Ethereum blockchain) and attached to certain dApps, but each NFT has a unique identifier on the blockchain, making them one of a kind. In this case, an NFT cannot automatically be exchanged for another similar asset. They’re also indivisible; a Bitcoin can be broken down into smaller units, but an NFT cannot.

So while BTC, XRP and other cryptocurrencies can be compared to money, NFTs are more like valuable artworks, antiques, festival tickets or collector’s items, such as a signed sports jersey. Their value comes from their uniqueness. It’s important not to see these tokens as currency but rather as distinct items.

The origins of the NFT hype

NFTs first captured the attention of the cryptocurrency scene with Dapper Labs’ CryptoKitties, a social game that creates unique digital cats to collect and breed. Each kitty is an NFT. Other blockchain-based trading games, such as Blockchain Heroes and Gods Unchained, also use NFTs as their digital game items.

NFTs also made a splash in the digital art world. Digital art in the form of NFT tokens can be bought and traded on platforms like Rarible and SuperRare. Even at the highest level of the traditional fine art dealership world, clever forgeries have fooled collectors and duped them out of many thousands of dollars. NFTs make such deception impossible; every digital art piece represented by an NFT is 100% authentic.

Why are non-fungible tokens useful?

NFT tokens can be used for anything where uniqueness is a priority, and the potential for forgery or piracy represents a significant risk to value. These could be domain names, certificates for qualifications or ownership, medical reports, festival tickets, valuable company data, patents and more.

For creators, the ability to auction digital art directly to buyers without galleries and dealerships could represent a revenue revolution. Royalties can be programmed into an NFT and automatically executed via smart contract so that the original artist gets their cut every single time their creation changes hands. That represents an incredible empowering of the individual creator, who might otherwise sell to a dealer only to receive nothing when that dealer sells the artwork at a huge profit at auction.

The built-in ability for the primary issuer of an NFT to cash in on secondary market sales could transform multi-user games or online communities that otherwise tend to hoard limited-issue digital items or try to quash secondary market sales. If there was a way to guarantee the creator their cut, IP holders might prefer to let their digital items be freely re-sold without fear of loss.

What kind of people are buying up NFTs for over $500 each?

When the digital age commenced, we became used to the devaluation of digital items. However, the ecosystem has matured, and money is as much a part of the online space as it is of the physical world. Some NFT buyers are simply collectors indulging their hobbies. Others hope to profit off of selling a unique object at auction. And the demand is there. For example, CryptoPunks, a digital art collection composed of pixel art of various ‘punk’ heads, reports that the average sale price of a punk over the last year was 10.83 ETH ($17,307.87), with the total value of punks sold over the last year clocking in at 69,742.36 ETH ($111,422,479.26). The CryptoKitty Dragon is also priced at an eye-watering 600 ETH, or $946,000!

Other NFT adopters are visionaries looking into the possibility of digital space, such as the worlds offered by virtual reality. VR galleries could be used to display NFT-authenticated digital artworks, but NFTs could also secure actual real estate in digital environments. Second Life-inspired worlds like Decentraland and Somnium Space VR use NFTs for ownership of digital real estate, from which the landlords can operate services and charge rent.

Are NFTs a good investment?

That depends. The key aspect of NFTs is that they are unique, so any investor should take the time to research the particular circumstances of a type of NFT. Many of these tokens are community-based, whether they’re art fans or denizens of virtual worlds. Actually getting to know the communities involved will enable a prospective investor to have an idea of what is valued now and what it might be in the future. The comparisons to art, collector’s items, or property should apply — think of NFTs not as currency to exchange but as artworks that can be ‘flipped’ for a profit.

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